Sunday, March 21, 2010

Budgeting 101-Step 2_Ready, Set, Go

This is Step 2 of my posts concerning how to set up and use a budget. If you missed step one, just click here.

Now that you have an idea of how much you are spending in each category, now it is time to formalize your budget. I started with a spreadsheet and listed down the first column all of the categories that I had found in my search of where my money was going. Leave the first four rows blank. It may be a bill that you do not pay but once a quarter or once a year, but it needs to have a row. Since I have teenagers driving, I have a separate line for each son's gas and lunch. I have a set amount in my budget that I will contribute to their gas fund and any gas over that, they have to fund. It roughly comes out to the gas they need to go back and forth to school, any trips outside of that they cover the costs.

Next, across the top of the page, in column 2 list the first payroll date for the month. In the third column, list the next payroll date. For example, if you get paid twice a month, you would have two columns to the right of your first column listing where your money is going. If you and your spouse get paid on a separate week, you may have up to four columns for payroll dates. Personally, even though we get paid during the same week, I like to have a column for my pay and a column for my husband's pay the first part of the month. The second half of the month, I combine.

Now, start at the beginning of the month and work out which bills need to be paid from which payroll. This way, when you get paid you automatically know which bills need to be paid out of the check. I personally like to be one payroll ahead but it did take me awhile to work myself up to that. If you get paid twice a month, you will have two extra payrolls each year. At that time you can pay everything ahead at that time if you so desire.

On the third row under the payroll date, I list the amount of take home pay I will receive. Then I go down the list on the left and fill in the amount under the payroll date that the bill needs to be paid from. For example, if the electricity bill needs to be paid by the 10th, then I will need to pay that bill from my first payroll. If your first payroll of the month does not occur until after the 10th of the month, then that bill must be paid from the previous month's second payroll. According the Dave Ramsey, you should have every dollar spent (budgeted) before the month begins. So this process should take place at the end of the previous month. That way, as soon as you receive your pay, you know actually where each dollar should be spent.

Now I like to have a formula at the bottom of the page that will take my income and subtract each bill and let me know if I am over or short on what I want to pay out of that payroll. It also helps me know if I need to move some bills from one payroll to another if I have more due at the first of the month than at the end of the month. For those items that you only pay once a year, such as taxes or insurance, list them under the payroll date that has the extra income. Then that week, move that amount to your savings each month for that quarterly or annual bill.

Remember, you will never have a perfect budget so do not become discouraged. It is best to have a little bit of cushion built in to take care of those little uh-oh's that will occur.

Stay tuned for Step 3.

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